In recent times, lifting the so-called "debt ceiling" --- the legal authority of the U.S. Treasury to issue government debt --- has become more politically contentious than in the past. Many government spending programs are funded by deficits, so if Congress were to fail to raise the debt ceiling then those programs would have to be cut back.

Formally, suppose the economy starts at potential output Y* and that there is a permanent decline in government spending G. Furthermore, assume the zero lower bound is never binding in this question.

Which of the following is true about the labor market in the short run? (Select one)

a. The real wage falls and employment rises

b. The real wage stays the same and employment rises

c. The real wage rises and employment falls

d. The real wage falls and employment falls

e. The real wage rises and employment rises

f. The real wage stays the same and employment falls

g. None of the above